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Pleading Loss Causation — Does Fed. R. Civ. P. 8(a) or 9(b) Apply? Circuit Split

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In re Fairway Grp. Holding Corp. Secs. Litig., 2015 U.S. Dist. LEXIS 5999 (S.D.N.Y. Jan. 20, 2015):

Loss causation is an essential element of a Section 10(b) and Rule 10b-5 claim, but the pleading requirement is not meant to impose a great burden on plaintiffs. See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346-47, 125 S. Ct. 1627, 1633-35 (2005). To establish loss causation in a case involving allegations of material misrepresentations and omissions, "a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered." Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001); accord, e.g., Lentell v. Merril Lynch & Co., 396 F.3d 161, 173 (2d Cir.), cert denied, 546 U.S. 935, 126 S. Ct. 421 (2005); see also, e.g., Dura Pharm., Inc. v. Broudo, 544 U.S. at 344-45, 125 S. Ct. at 1633-34; ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 107 (2d Cir. 2007); Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 197 (2d Cir. 2003).17 It is not enough for a plaintiff to merely allege that, at the time of plaintiff's purchase of a security, the price of that security was artificially inflated as a result of a defendant's misrepresentation. Dura Pharm., Inc. v. Broudo, 544 U.S. at 344-45, 125 S. Ct. at 1633-34; Lentell v. Merrill Lynch & Co., 396 F.3d at 174; Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d at 198; In re NTL, Inc. Sec. Litig., 2006 WL 330113 at *9.18 Instead, a plaintiff "may do one of two things to sufficiently allege loss causation. 'Where the alleged misstatement conceals a condition or event which then occurs and causes the plaintiff's loss,' a plaintiff may plead [*43]  that it is 'the materialization of the undisclosed condition or event that causes the loss.' Alternatively, a plaintiff may identify particular 'disclosing event[s]' that reveal the false information, and tie dissipation of artificial price inflation to those events." Catton v. Def. Tech. Sys., Inc., 05 Civ. 6954, 2006 WL 27470 at *5 (S.D.N.Y. Jan. 3, 2006) (quoting In re Initial Pub. Offering Sec. Litig., 399 F. Supp. 2d 298, 307 (S.D.N.Y. 2005)).19 Allegations of loss causation are evaluated under the notice pleading standard in Federal Rule of Civil Procedure Rule 8, and a short plain statement that provides defendants with notice of the loss and its causal connection to the alleged misconduct is sufficient. Dura Pharm., Inc. v. Broudo, 544 U.S. at 346, 125 S. Ct. at 1633; see also, e.g., Van Dongen v. CNinsure Inc., 951 F. Supp. 2d 457, 469 (S.D.N.Y. 2013); Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d at 202.20

17   See also, e.g., Prime Mover Capital Partners L.P. v. Elixir Gaming Technologies, Inc., 898 F. Supp. 2d 673, 684-85 (S.D.N.Y. 2012), aff'd, 548 F. App'x 16 (2d Cir. 2013); Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 202 (S.D.N.Y. 2010); In re NTL, Inc. Sec. Litig., 02 Civ. 3013, 2006 WL 330113 at *9 (S.D.N.Y. Feb. 14, 2006), report & rec. adopted, 2006 WL 568225 (S.D.N.Y. Mar. 9, 2006) (Kaplan, D.J.).

18   "[I]f the loss was caused by an intervening event, like a general fall in the price of Internet stocks, the chain of causation will not have been established." Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d at 197; accord, e.g., Lentell v. Merril Lynch & Co., 396 F.3d at 174; see also, e.g., Dura Pharm., Inc. v. Broudo, 544 U.S. at 342-43, 125 S. Ct. at 1631-32; In re NTL, Inc. Sec. Litig., 2006 WL 330113 at *9 n.11.

19   Accord, e.g., Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d at 202 ("A risk allegedly concealed by defendants which materialized and arguably caused the decline in shareholder value suffices."); In re AOL Time Warner, Inc. Sec. Litig., 503 F. Supp. 2d 666, 677 (S.D.N.Y. 2007); In re NTL Inc. Sec. Litig., 2006 WL 330113 at *9 & n.12; In re GeoPharma, Inc. Sec. Litig., 399 F. Supp. 2d 432, 444 (S.D.N.Y. 2005); Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 05 Civ. 1898, 2005 WL 2148919 at *6 (S.D.N.Y. Sept. 6, 2005); see, e.g., In re Parmalat Sec. Litig., 375 F. Supp. 2d 278, 305-06 (S.D.N.Y. 2005) (Kaplan, D.J.).

20   In Acticon AG v. China N.E. Petroleum Holdings Ltd., 692 F.3d 34, 38 (2d Cir. 2012), the Second Circuit identified (but did not decide) a circuit split regarding whether [*44]  Fed. R. Civ. P. 8(a) or 9(b) applies to pleading loss causation. Decisions in this District subsequent to Acticon still have applied the "short plain" statement standard to loss causation. See, e.g., In re Magnum Hunter Res. Corp. Sec. Litig., 13 Civ. 2668, 2014 WL 2840152 at *10 (S.D.N.Y. June 23, 2014)

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New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

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